quote:Miners use expensive hardware (currently GPU's/FPGA's, soon to be ASIC's) and special software to essentially crack codes. This process is very electricity intensive and requires a lot of energy and technical skill. It is not cheap to do.

My biggest issue with Bitcoin is how does it have the potential to become a worldwide currency when the average Joe can't understand it's complexity. You're talking about introducing something really complex filled with uncertainty while compared to the USD, a 5 year old could understand it's value, the same goes with almost any currency around the world. Now I will say there is always uncertainty with almost any currency but do you really expect a young working teenage kid to be able to handle Bitcoins? Maybe I'm over thinking this.

quote:My biggest issue with Bitcoin is how does it have the potential to become a worldwide currency when the average Joe can't understand it's complexity. You're talking about introducing something really complex filled with uncertainty while compared to the USD, a 5 year old could understand it's value, the same goes with almost any currency around the world. Now I will say there is always uncertainty with almost any currency but do you really expect a young working teenage kid to be able to handle Bitcoins? Maybe I'm over thinking this.

No, you're actually not overthinking it at all.

One of the biggest hurdles that the bitcoin community knows it needs to overcome is the complexity.

Understanding the underlying system is not necessary for anyone to use bitcoin. After all, I don't think most people understand the federal reserve system in the US, but most people understand how to use the money. Therefore, getting users to understand how to properly secure their bitcoin wallet(s), how to exchange bitcoins safely, and how to backup their wallet(s) in case of disaster, and how to pass on their bitcoin assets in case they die, among other issues, all need to be worked out.

And the bitcoin infrastructure is being built up to make all that stuff I listed much easier for the average user.

I think what you will see with bitcoins is similar to what you see IRL with banking. People will end up trusting third parties with securing and backing up their bitcoin data.

During mining, your computer runs a cryptographic hashing function (two rounds of SHA256) on what is called a block header. For each new hash, the mining software will use a different number as the random element of the block header, this number is called the nonce. Depending on the nonce and what else is in the block the hashing function will yield a hash which looks like this:

93ef6f358fbb998c60802496863052290d4c63735b7fe5bdaac821de96a53a9a

You can look at this hash as a really long number. (It's a hexadecimal number, meaning the letters A-F are the digits 10-15.) Now to make mining difficult, there is what's called a difficulty target. To create a valid block your miner has to find a hash that is below the difficulty target. So if for example the difficulty target is 1000000000000000000000000000000000000000000000000000000000000000, any number that starts with a zero would be below the target, e.g.:

0787a6fd6e0782f7f8058fbef45f5c17fe89086ad4e78a1520d06505acb4522f

If we lower the target to 0100000000000000000000000000000000000000000000000000000000000000, we now need two zeros in the beginning to be under it:

00db27957bd0ba06a5af9e6c81226d74312a7028cf9a08fa125e49f15cae4979

Because the target is such an unwieldy number with tons of digits, people generally use a simpler number to express the current target. This number is called the mining difficulty. The mining difficulty expresses how much harder the current block is to generate compared to the first block. So a difficulty of 70000 means to generate the current block you have to do 70000 times more work than Satoshi had to do generating the first block. Though be fair though, back then mining was a lot slower and less optimized.

The difficulty changes every 2016 blocks. The network tries to change it such that 2016 blocks at the current global network processing power take about 14 days. That's why, when the network power rises, the difficulty rises as well.

What the miners are actually doing is processing transactions. The calculations they perform help ensure the integrity of the ledger.

Right now, mining a block pays 25 bitcoins (called a block reward). However, it also includes any transaction fees that were included in the transactions in that block. So in total, a miner might get 27.xx or more, depending of the transactions fees included.

As the block reward becomes less and less (it halves every four years), the incentive for the miners to continue to process transactions will be the transaction fees. And as the bitcoin economy grows, more transactions will occur, thus more transaction fees can be collected.

But to put it simply, the mining calculations just ensure the integrity of the ledger by utilizing cryptographic technology.

Also, FWIW, transaction fees right now are not required, and when they do occur, they typically are equivalent to 1 US penny or less.

quote:I'd imagine the end game to fully develop an online currency that is difficult for government officials to trace, and thus becomes more attractive to bordeline legal activities such as gambling.

While bitcoin does facilitate borderline illegal activities, it can also be used legitimately.

quote:The problem with that though is how can a Bitcoin become a truly recognized currency without larger companies (Amazon, eBay) accepting it?

Who says they won't?

The CEO of BitPay* made a speech on why companies should accept bitcoin. He went through a convincing list of reasons why, including:

-prevention of fraud (no chargebacks): This is by design in the bitcoin network. Some will say no chargebacks are a bad thing for the consumer, but for the merchant, it is a money saver. We'll have to see how the market plays out in that regard. But there are already 3rd party escrow companies setup to mitigate any potential issues if desired

-lower transaction fees: He commented that Amazon pays about a billion dollars a year to credit card processors in fees. Imagine if, instead of paying .10-.15 cents per swipe, plus a percentage (isn't 3% pretty common?) of the sale to VISA and MasterCard, they only had to pay a fraction of a penny for each transaction? How much money would they save?

But yes, it will take a long time for Amazon to consider it. I doubt eBay ever would accept it because bitcoin is a threat to PayPal and eBay owns PayPal.

*BitPay is a company that provides services to other companies to allow them to accept bitcoins. BitPay will handle all the transactions and render the currency of choice to the company. For instance, if you sold something for $5 equivalent in bitcoin, you would get $5 US dollars (minus BitPay's transaction fees --I think they are 1.99% right now)

I'm just trying to wrap my mind around how merchants would accept the currency for tax purporses. Wouldn't there have to be some type of exhcange rate before the government recognized it as a means of payment?

quote:I'm just trying to wrap my mind around how merchants would accept the currency for tax purporses. Wouldn't there have to be some type of exhcange rate before the government recognized it as a means of payment?

Don't quote me on any of this because I'm no tax expert. Maybe poodlebrain could better answer this.

But if I buy bitcoins and sit on them while they appreciate in value, then I have to pay capital gains taxes on them when I sell them. Of course, this would require honesty since "bitcoin" is just a protocol and can't send tax documents to the IRS.

And if a business accepts bitcoin with the BitPay model I described above, I imagine they would just pay taxes based on the USD value.

Now, the more interesting question, and probably what you are ultimately getting at is this:

If a company accepts straight up bitcoins and doesn't convert them to USD immediately, how do they account for that at tax time? If the bitcoin was worth $15 USD at the time of them receiving it, but it's worth $25 when they file their taxes, how does that work? I truly don't know.

quote:If a company accepts straight up bitcoins and doesn't convert them to USD immediately, how do they account for that at tax time? If the bitcoin was worth $15 USD at the time of them receiving it, but it's worth $25 when they file their taxes, how does that work? I truly don't know

Also what I wanted to know but I feel like the tax system would have to change in order to use bitcoins. Obviously by the time we use such a universal currency there would be other developments along the way to support such. (Not saying bitcoins end up being a universal currency or that we even develop a universal currency in my lifetime.)

quote:I think what you will see with bitcoins is similar to what you see IRL with banking. People will end up trusting third parties with securing and backing up their bitcoin data

All that data floating around makes it a high potential to be hacked, don't you think? Instead of a bank robber robbing a bank, you have a Bitcoin robber. I just think it'll be that much easier for someone with the right credentials to hack the system, and correct me if I am wrong, this already happened right?

I have been watching some Youtube videos about mining and it appears that it takes more than one computer to do enough volume to actually see any noticeable gain. I saw one guy had 24 computers which allowed him to run at 48Gh (Not sure what that means but speed of your setup determines how many bitcoins you mine). The 48Gh equates to 15.71 Bitcoins a day. (Roughly 3.05Gh per bitcoin) Earlier in the thread someone said that a bitcoin is worth $17 so that means this guy brings in about $267 a day. I am not sure what his expenses would be...... I assume just maintenance and electricity.

What I don't understand is if there is a predetermined amount of bitcoins mined (I think the ratio discussed earlier was 25 Bitcoins every 10 minutes and in 4 years that will split) how does the speed of the computer determine how many bitcoins you mine. Wouldn't that depend on your computers speed vs. the speed of other miners computers. Is it not essentially a race to solve a problem? Who ever solves the equation gets the bitcoin... Right? So the guy with the fastest computer should win every time.... I'm confused

quote:All that data floating around makes it a high potential to be hacked, don't you think? Instead of a bank robber robbing a bank, you have a Bitcoin robber. I just think it'll be that much easier for someone with the right credentials to hack the system, and correct me if I am wrong, this already happened right?

Yes, there have been quite a few hacks and thefts of bitcoins. The issues have all had to do with lax security measures at the third party sites, and not any security vulnerabilities with the bitcoin protocol itself.

Third party bitcoin "banks" will need to up their security measures and work hard to build trust in the future.

quote:What I don't understand is if there is a predetermined amount of bitcoins mined (I think the ratio discussed earlier was 25 Bitcoins every 10 minutes and in 4 years that will split) how does the speed of the computer determine how many bitcoins you mine. Wouldn't that depend on your computers speed vs. the speed of other miners computers. Is it not essentially a race to solve a problem? Who ever solves the equation gets the bitcoin... Right? So the guy with the fastest computer should win every time.... I'm confused

There is some truth to this, which is why people invest in some serious hardware for their mining. However, mining relies on luck as well, which is also a reason many people prefer to mine in "pools" because it increases the chance that you will get a reward.

In other words: solo mining = high reward, but no guarantee that you'll actually get them

pooled mining = lower rewards, but a much higher chance that someone in your pool will have luck